Recs

6

Will McDonald's Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

There are few companies that manage to grab customers early in childhood and hold on to them throughout their lives, but McDonald's (NYSE: MCD  ) is definitely one of them. With its world-leading fast-food franchise, McDonald's deserves its place among the Dow Jones Industrials (DJINDICES: ^DJI  ) . It has become a cultural icon of the U.S. that has translated its success across the globe, finding growth nearly everywhere it has gone. But how long can the Golden Arches keep expanding? Below, we'll revisit how McDonald's does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at McDonald's.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$95.5 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

4 years

Pass

Stock stability

Beta < 0.9

0.39

Pass

 

Worst loss in past five years no greater than 20%

(9.3%)

Pass

Valuation

Normalized P/E < 18

19.46

Fail

Dividends

Current yield > 2%

3.2%

Pass

 

Five-year dividend growth > 10%

13.9%

Pass

 

Streak of dividend increases >= 10 years

36 years

Pass

 

Payout ratio < 75%

57.5%

Pass

       
 

Total score

 

9 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at McDonald's last year, the company has held onto its nine-point score for the third year in a row. Only a slightly high valuation has held McDonald's back from a perfect 10, even as the stock has fallen by 5% over the past year.

After weathering the financial crisis quite well, McDonald's has had a tough time lately. In January the company posted negative same-store sales for the second time in four months, with sales falling around the world. Only the U.S. market managed a slight gain.

A big part of the challenge McDonald's faces is the fact that healthier food offerings have become more popular. Chipotle Mexican Grill (NYSE: CMG  ) , which was originally a spinoff from McDonald's, has enjoyed huge growth because of its quality ingredients, despite having a very simple menu. Panera Bread (NASDAQ: PNRA  ) has also driven sales by emphasizing quality and tapping into a demographic that has more disposable income to spend.

But McDonald's also faces competition from more traditional challengers. Burger King has renewed its efforts to regain its former glory by bulking up its menu. Meanwhile, in emerging markets, Yum! Brands (NYSE: YUM  ) remains McDonald's archrival, with KFC in particular going head-to-head against the Golden Arches for Chinese supremacy.

Interestingly, McDonald's has made a recent push toward sustainability. By switching its fish supply to abundant Alaskan pollock, McDonald's has climbed onto a bandwagon that has seen other major food-sellers hopping on, and the company has demonstrated a continued commitment to ethical practices after agreeing to stop using gestation crates in the next decade.

For retirees and other conservative investors, decades of dividend growth arguably make up for a somewhat pricey valuation. With shares offering a rare decline, retirement investors have an opportunity to buy McDonald's on a dip -- and that's something that has historically paid off with extraordinary long-term gains.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills and teach you how to separate the right stocks from the risky ones.

Learn much more about whether McDonald's is a bargain buy in our premium research report on the stock. Inside, you'll get the latest analysis to guide your investment decision on the fast-food giant's shares. Click here now to read this report today.

Add McDonald's to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2253123, ~/Articles/ArticleHandler.aspx, 7/23/2014 9:06:51 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated Moments ago Sponsored by:
DOW 17,086.63 -26.91 -0.16%
S&P 500 1,987.01 3.48 0.18%
NASD 4,473.70 17.68 0.40%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

7/23/2014 4:31 PM
^DJI $17086.63 Down -26.91 -0.16%
DOW JONES INDUSTRI… CAPS Rating: No stars
MCD $95.35 Down -0.92 -0.96%
McDonald's CAPS Rating: ***
CMG $661.27 Up +1.50 +0.23%
Chipotle Mexican G… CAPS Rating: ***
PNRA $144.41 Down -0.84 -0.58%
Panera Bread CAPS Rating: ****
YUM $74.71 Down -0.13 -0.17%
Yum! Brands CAPS Rating: ****

Advertisement